Public service cuts will fuel reform24 March 2010
Britain has got used to living beyond its means, as if ever-increasing welfare benefits and public services can be made available without extra cost. But we have to repair the link between tax and spending. In economics, as in life, a hangover follows the binge.
Long term, reform of the public sector is needed to achieve greater productivity and quality, but the chancellor's task right now is to eliminate the structural deficit of around £100bn. The burden of the adjustment should be borne by tax increases and spending reductions, on a ratio of 1:7, following the rule of thumb implemented in Canada when it successfully rescued its public finances in the 1990s.
In all countries, public spending largely goes on benefit payments and public services. Of public services, labour is the biggest cost. Our political leaders say they will cut public spending but protect frontline services. This doesn't make sense. The other heavily indebted EU countries - Portugal, Greece, Ireland and Spain - have announced plans that show what we should do. Portugal, for instance, is means-testing more benefits and cutting the costs of the public sector workforce. Ireland and Greece are cutting the costs of the public workforce through reductions in pay (an average of 7% and 10% respectively) and headcount, and are reforming public sector pensions.
Meanwhile, the EU has criticised Britain's deficit-cutting plans as lacking ambition. Since a massive whack of our public spending goes on welfare, health and education, each of these should expect cuts in line with their shares of spending. Some cuts can start immediately. Non-pensioner benefits accounted for £127bn in 2008-09, or 20% of all government spending, so the chancellor needs to announce policies in today's budget that will reduce benefit payments by restricting eligibility and encouraging employment and wage growth. A substantial proportion of welfare goes on middle and high earners, rather than those in need, such as through child benefit, child and working tax credits and winter fuel allowance. Simply cutting these would save £14bn next year.
Health is the biggest departmental budget- at £110bn, or 18% of total spending - and it has consumed most of the increases in public sector inputs, with most of these increases going on wage inflation. Last year, consultants McKinsey estimated that 140,000 jobs will have to go - and since only 14% of the 1.4 million NHS workers are managers, cuts should include the frontline.
Still, if change is scary, it brings opportunities as well as risks, such as innovation in workforce and service structure. Our commitment should be to patient care, not facilities, and the major push should be to accelerate the migration of care out of expensive hospital settings into the community and home, improving the quality of care - clinical outcomes and patient experience and reducing costs.
As long as our debt-to-GDP ratio is rising, Britain is in the danger zone, but we should keep our eyes on the prize: efficient, effective services for citizens in a growing economy.